Bel Fuse (BELFA) - 2021 Q4 - Annual Report

FORM 10-K General Information Filing Information Bel Fuse Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2021, with principal executive offices in Jersey City, NJ - The report is an Annual Report on Form 10-K for the fiscal year ended December 31, 2021[1] - Bel Fuse Inc. is headquartered at 206 Van Vorst Street, Jersey City, NJ 07302[1] Securities Information Bel Fuse Inc. lists Class A (BELFA) and Class B (BELFB) Common Stock on the NASDAQ Global Select Market, with no securities registered under Section 12(g) of the Act Registered Securities | Title of Each Class | Trading Symbol | Name of Each Exchange on which Registered | |:-----------------------------|:---------------|:------------------------------------------| | Class A Common Stock ($0.10 par value) | BELFA | NASDAQ Global Select Market | | Class B Common Stock ($0.10 par value) | BELFB | NASDAQ Global Select Market | - No securities are registered pursuant to Section 12(g) of the Act[3] Registrant Status Bel Fuse Inc. is an accelerated filer and smaller reporting company, not a well-known seasoned issuer, having filed all required reports electronically - The registrant is not a well-known seasoned issuer[3] - The registrant is an accelerated filer and a smaller reporting company[4] - The registrant has filed all required reports and submitted all Interactive Data Files electronically during the preceding 12 months[3] Outstanding Shares & Documents Incorporated by Reference As of March 1, 2022, Bel Fuse Inc. had 2.14 million Class A and 10.37 million Class B Common Stock shares outstanding, with a non-affiliate market value of $170.1 million as of June 30, 2021 Common Stock Outstanding as of March 1, 2022 | Title of Each Class | Number of Shares of Common Stock Outstanding as of March 1, 2022 | |:---------------------|:-----------------------------------------------------------------| | Class A Common Stock | 2,144,912 | | Class B Common Stock | 10,373,102 | - The aggregate market value of voting and non-voting common equity held by non-affiliates was $170.1 million as of June 30, 2021[5] - Portions of Bel Fuse Inc.'s Definitive Proxy Statement for the 2022 Annual Meeting of Shareholders are incorporated by reference into Part III[7] CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION This section cautions that forward-looking statements are subject to risks and uncertainties beyond the company's control, potentially causing material differences in actual results, with no obligation to update - Forward-Looking Statements are subject to risks and uncertainties, many outside the company's control, that could cause actual results to differ materially[14] - The Company undertakes no obligation to publicly release the results of any revisions to these Forward-Looking Statements[14] PART I Item 1. Business Bel Fuse Inc. designs, manufactures, and markets electronic circuit products globally, focusing on growth through acquisitions, innovation, human capital, and environmental initiatives Company Overview Bel Fuse Inc., established in 1949, designs and markets electronic circuit products globally, operating facilities across North America, Europe, and Asia, and trading on NASDAQ - Bel Fuse Inc. designs, manufactures, and markets products that power, protect, and connect electronic circuits[15] - Products are primarily used in networking, telecommunication, computing, high-speed data transmission, military, commercial aerospace, transportation, e-Mobility, and broadcasting industries[15] - The Company operates facilities in North America, Europe, and Asia and trades on the NASDAQ Global Select Market (ticker symbols BELFA and BELFB)[17] Acquisitions Acquisitions are central to Bel's growth, with 2021 purchases of EOS Power for $7.8 million and rms Connectors for $9.0 million expanding product lines and manufacturing capabilities - Acquisitions are a critical element in Bel's growth strategy, expanding product portfolio and customer base[18] - Acquired EOS Power on March 31, 2021, for $7.8 million, enhancing penetration of industrial and medical markets and diversifying manufacturing in Asia[19] - Acquired rms Connectors on January 8, 2021, for $9.0 million, complementing existing military and aerospace product portfolios[20] Products Bel's revenue stems from three product groups: Power Solutions & Protection (40%), Connectivity Solutions (30%), and Magnetic Solutions (30%), offering diverse products across various applications 2021 Net Sales by Product Group | Product Group | % of Net Sales in 2021 | |:-----------------------------|:-----------------------| | Power Solutions & Protection | 40% | | Connectivity Solutions | 30% | | Magnetic Solutions | 30% | - Power Solutions and Protection products include AC/DC power supplies, DC/DC converters, DC/AC inverters, and circuit protection devices for industrial, networking, and consumer applications[23][24] - Connectivity Solutions offer high-speed and harsh-environment copper and optical fiber connectors and assemblies for commercial aerospace, military, and network infrastructure[25][26] - Magnetic Solutions include Integrated Connector Modules (ICMs), power transformers, and SMD power inductors for networking and industrial applications[26][27] Sales and Marketing Bel distributes products globally via direct sales, independent representatives, and authorized distributors, supported by 201 sales and support staff as of December 31, 2021, focusing on customer support and new product development - Products are sold through direct strategic account managers, regional sales managers with independent sales representative organizations, or authorized distributors[29] - As of December 31, 2021, Bel had a sales and support staff of 201 persons[30] - Marketing capabilities include product management for new product development, application engineering for technical support, and marketing communications[31] Market Factors Bel competes in highly competitive markets, with product orders increasing 87% to $837.7 million in 2021 and a backlog of $498.0 million by February 28, 2022, though supply chain issues pose shipment risks - The company operates in highly competitive markets, competing on product performance, quality, reliability, depth of product line, customer service, technological innovation, design, delivery time, and price[32][33] Product Orders (Bookings) 2021 vs. 2020 (Millions) | Metric | 2021 | 2020 | Change (%) | |:----------------------------------------|:----------------|:----------------|:-----------| | Total Product Orders | $837.7 | $448.0 (est.) | 87% | | Power Solutions and Protection Orders | $378.5 | $182.7 (est.) | 107% | | Magnetic Solutions Orders | $258.7 | $139.1 (est.) | 86% | | Connectivity Solutions Orders | $200.5 | $126.9 (est.) | 58% | Backlog of Orders (Millions) | Date | Backlog | |:-----------------|:-------------------| | Feb 28, 2022 | $498.0 | | Feb 28, 2021 | $179.6 | - Approximately 70%-75% of the backlog as of February 28, 2022, is estimated to be shipped by December 31, 2022, but supply difficulties and demand changes could impact timing[35] Research and Development ("R&D") Bel's globally distributed R&D focuses on developing leading-edge products for markets like e-Mobility and cloud computing, with all R&D costs expensed as incurred - Engineering groups are strategically located globally to facilitate communication and access to customers' engineering personnel, enabling partnerships for technical development[36] - R&D efforts focus on developing leading-edge technological products for complex markets such as e-Mobility, cloud computing, military, and aerospace[36] - R&D costs, including salaries, building maintenance, utilities, rents, materials, and administrative costs, are expensed as incurred[37] Resources Bel utilizes multiple raw material suppliers and holds global patents and trademarks, but prioritizes personnel skills over patent ownership for business success, while acknowledging potential supply disruptions - Bel has multiple suppliers for most raw materials and contractual agreements for critical components[38] - The company has acquired or been granted numerous patents in the U.S., Europe, and Asia, with additional applications pending[40] - Management believes business success depends more on the innovative skills, technical competence, and marketing/managerial abilities of personnel than on patent ownership[40] Government Contracts Bel must adhere to U.S. Government contract laws, facing risks of fines, penalties, or termination for non-compliance, with contracts also subject to termination for convenience - The company is subject to U.S. Government contract laws and regulations, which can impose added costs and risks of fines, penalties, or contract termination[42] - Violations could lead to fines, penalties, contract termination, or debarment from bidding on contracts[42] - The U.S. Government may terminate contracts for convenience, entitling the company to purchase price for delivered items and reimbursement for allowable costs[44] Seasonality Bel's first-quarter sales are typically lowest due to PRC Lunar New Year labor migration, causing production setbacks and volatile labor costs from recruitment and overtime - First-quarter sales are historically the lowest due to cyclical labor availability in the PRC during the Lunar New Year holiday[45] - Recruiting and training new workers, along with overtime, can add volatility to labor costs in the PRC, primarily in the first quarter[45] Government Regulations Bel is subject to diverse government regulations across its operating jurisdictions, including trade compliance, anti-bribery, and data privacy, with non-compliance risking legal penalties or business conduct changes - The Company is subject to various government regulations in the United States and other jurisdictions where it operates[46] - Regulations cover trade compliance, anti-bribery, anti-corruption, money laundering, and data and privacy protection[46] - Regulatory non-compliance can result in legal penalties or imposed changes in business conduct[46] Human Capital Resources, Strategy and Management Bel's human capital strategy prioritizes performance, associates, health, safety, and an inclusive culture, employing approximately 6,300 associates across 15 countries as of December 31, 2021 - Bel's Human Capital Strategy is built around four areas: Extraordinary Performance, Great Associates, Health and Safety, and Culture[48][50][52][54] - As of December 31, 2021, Bel employed approximately 6,300 associates across 15 countries, with 23% in North America[48] - The company is committed to fostering diversity, investing in associate learning and development, and maintaining health and safety programs globally[50][51][52] Environmental Initiatives Bel integrates ESG into its operations, committing to continuous environmental improvement, with many sites complying with sustainable development specifications like ISO-9001 and ISO-14001 - ESG is a key component of Bel's processes and operations, with a commitment to continual improvement in environmental performance[57] - Many Bel sites comply with sustainable development specifications such as ISO-9001 and ISO-14001[57] Available Information Bel's website (www.belfuse.com) offers free access to SEC filings, press releases, investor presentations, and corporate governance materials - Bel maintains a website (www.belfuse.com) providing free access to SEC filings (proxy statements, 8-K, 10-K, 10-Q) and amendments[58] - The website also includes press releases, notifications of quarterly/annual results broadcasts, investor presentations, and corporate governance materials[58] Item 1A. Risk Factors This section details strategic, operational, financial, legal, tax, regulatory, and common stock risks that could materially affect Bel's business, including competition, IP, acquisitions, global operations, supply chain, and debt Strategic Risks Bel faces strategic risks from intense global competition, inadequate intellectual property protection, acquisition integration challenges, and dependence on developing new, technologically advanced products - The company operates in a highly competitive, globalized industry with significant financial resources and technological capabilities among major competitors[60] - Intellectual property rights may not be adequately protected, leading to potential misappropriation or inability to enforce proprietary rights[61] - Acquisitions, a significant portion of growth, may not produce anticipated results or be successfully integrated, potentially leading to impairment charges[62][63] - Future operating results are dependent on the ability to develop, produce, and market new and more technologically advanced products, with inherent risks in anticipating technological change[64] Operational Risks Operational risks include health epidemics, labor issues (especially in PRC), raw material procurement challenges, and foreign currency exposure due to significant PRC manufacturing operations - Global operations face risks from health epidemics like COVID-19, including facility closures, travel restrictions, and supply chain disruptions[66][67] - The company may experience labor unrest or shortages, particularly in the PRC, due to lay-offs, union representation, or cyclical labor migration[68][69] - Shortages or increased costs of raw materials, components (e.g., capacitors, ferrites, ICs), and other resources may negatively impact profit margins[70][71] - Substantial manufacturing operations in the PRC (62% of associates, 73% of manufacturing facilities by square footage, 26% of tangible assets as of Dec 31, 2021) expose the company to foreign currency risk, labor cost increases, and extensive government regulation[73][74][75][76][77] Financial Risks Bel's profit margins are susceptible to price declines, cost increases, and foreign exchange fluctuations, while backlog reliability is uncertain due to cancellations and supply chain issues, and significant debt impacts capital access and covenant compliance - Profit margins can suffer from declines in selling prices, increases in material costs (e.g., gold, copper, silver), and rising labor costs (especially in PRC, Mexico, Slovakia)[83][84][85][86][87] - Backlog figures may not be reliable indicators of future sales due to potential customer cancellations, double ordering, and ongoing macroeconomic and supply chain challenges[88] - The company's level of indebtedness could negatively impact access to capital markets and ability to satisfy financial covenants under its credit agreement[89][90][91][92][93] Legal, Tax and Regulatory Risks Bel faces legal, tax, and regulatory risks from IP infringement lawsuits, adverse tax law changes, and evolving data privacy regulations, potentially incurring litigation costs, penalties, or operational changes - The company may be sued by third parties for alleged infringement of proprietary rights, incurring defense costs, royalty obligations, or loss of technology use[94][95] - Adverse developments in tax laws or disagreements with tax positions in multiple jurisdictions could materially affect business and financial results[96][97] - Expanding data privacy laws and regulations (e.g., post-Brexit) could impact business and expose the company to increased liability and significant financial penalties for non-compliance[98] Risks Related to Our Common Stock Protective provisions can suspend Class A common shareholders' voting rights, potentially increasing officer and director voting power, while Bel's common stock market price remains volatile due to various factors - Protective provisions in the Company's certificate of incorporation can suspend voting rights of Class A common shareholders who acquire 10% or more of outstanding Class A stock without proportional Class B ownership[100][101] - Such suspensions increase the voting power of Class A common shareholders whose voting rights are not suspended, including executive officers and directors[102] - The market price of common stock has been and may continue to be volatile due to variations in quarterly operating results, technological/competitive developments, economic conditions, acquisitions, and changes in financial performance estimates[103][104] General Risks Bel's global operations across 15 countries face risks from COVID-19, trade regulations, foreign exchange, political instability, and enforcement challenges, alongside cyber threats and loss of key personnel - Global operations in 15 countries expose the company to risks such as COVID-19 disruptions, import/export regulations, foreign exchange controls, political instability, and difficulties in enforcing agreements[106][107][108] - Cyber risks and failures in operational or security systems could lead to data breaches, financial penalties, reputational damage, and lost revenues[112][113] - The loss of services from executive officers or other skilled associates, who are difficult to replace, could negatively impact operations and results[114][115] Item 1B. Unresolved Staff Comments No unresolved staff comments are reported - None[116] Item 2. Properties Bel Fuse Inc., headquartered in Jersey City, NJ, operates 20 manufacturing facilities across 7 countries, totaling 2.2 million square feet (14% owned), with significant operations in Asia, particularly the PRC - The Company is headquartered in Jersey City, New Jersey, owning 19,000 square feet of office and warehouse space[118] - Bel operated 20 manufacturing facilities in 7 countries as of December 31, 2021, totaling 2.2 million square feet, with approximately 14% owned[119] - A significant portion of the Company's manufacturing operations and approximately 35.6% of its identifiable assets are located in Asia[120] Item 3. Legal Proceedings Legal proceedings information is incorporated by reference from Note 18, 'Commitments and Contingencies,' in the consolidated financial statements - Information for this item is incorporated by reference to 'Legal Proceedings' in Note 18, 'Commitments and Contingencies'[121] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[121] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Bel Fuse Inc.'s Class A and Class B Common Stock trade on NASDAQ, with 42 registered Class A and 300 registered Class B shareholders as of February 28, 2022, and quarterly dividends totaling $3.4 million in 2021 and 2020 - Class A Common Stock (BELFA) and Class B Common Stock (BELFB) are traded on the NASDAQ Global Select Market[123] Shareholder Information (as of Feb 28, 2022) | Class of Stock | Registered Shareholders | Beneficial Shareholders | |:---------------|:------------------------|:------------------------| | Class A | 42 | 531 | | Class B | 300 | 2,280 | Dividends Declared (Millions) | Year | Class A Dividend per Share | Class B Dividend per Share | Total Dividends | |:-----|:---------------------------|:---------------------------|:---------------------------| | 2021 | $0.06 | $0.07 | $3.4 | | 2020 | $0.06 | $0.07 | $3.4 | Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Bel's 2021 and 2020 financial condition and operational results, covering business overview, COVID-19 impact, key performance factors, segment results, cost analysis, tax, liquidity, and critical accounting estimates Overview Bel Fuse Inc. designs and markets electronic circuit products across three segments: Power Solutions and Protection (40%), Connectivity Solutions (30%), and Magnetic Solutions (30%), with operating expenses driven by labor, material, and overhead - Bel Fuse Inc. designs, manufactures, and markets products that power, protect, and connect electronic circuits for networking, telecommunication, computing, high-speed data transmission, military, commercial aerospace, transportation, e-Mobility, and broadcasting industries[129] 2021 Revenues by Product Group Segment | Product Group Segment | % of Company's Revenues in 2021 | |:-----------------------------|:--------------------------------| | Power Solutions and Protection | 40% | | Connectivity Solutions | 30% | | Magnetic Solutions | 30% | - Operating expenses are driven by labor costs (factories in U.S., Mexico, Dominican Republic, England, Czech Republic, Slovakia, PRC), material costs, and overhead management[131] The Effects of COVID-19 on Bel's Business COVID-19 caused temporary facility closures and travel restrictions in 2020-2021, but Bel maintained essential operations, experiencing inefficiencies and higher freight costs, with March 2022 PRC shutdowns posing ongoing supply risks - COVID-19 led to temporary facility closures and travel restrictions in 2020 and 2021, but Bel's operations continued as many products are essential for military, medical, and networking applications[133][135] - The company experienced operational inefficiencies, higher freight costs, and supply chain delays due to port congestion and intermittent supplier shutdowns in late 2021[135][138] - In March 2022, two manufacturing facilities in Shenzhen and Changping, China, were temporarily closed due to PRC government COVID-19 outbreaks and testing mandates, posing a supply continuity risk[139] Other Key Factors Affecting our Business Bel's 2021 revenues grew 16.7% to $543.5 million, with backlog surging over 200% to $467.8 million, while material costs rose to 46.2% of sales and restructuring costs of $1.2 million are expected to yield $0.9 million in annualized savings Revenue Growth 2021 vs. 2020 (Millions) | Metric | 2021 | 2020 | Change (%) | |:----------------------------------------|:----------------|:----------------|:-----------| | Total Revenues | $543.5 | $465.8 | 16.7% | | Power Solutions and Protection Sales | $218.0 | $181.5 | 20% | | Magnetic Solutions Sales | $160.4 | $133.6 | 20% | | Connectivity Solutions Sales | $165.0 | $150.7 | 9% | Backlog of Orders (December 31, Millions) | Date | Backlog | Change (%) | |:-----------------|:-------------------|:-----------| | Dec 31, 2021 | $467.8 | >200% | | Dec 31, 2020 | $155.0 | | Cost Changes (as % of Sales) | Cost Category | 2021 | 2020 | |:-----------------|:------|:------| | Material Costs | 46.2% | 43.3% | | Labor Costs | 9.0% | 9.9% | - Restructuring charges of $1.2 million were recorded in 2021 for exiting a custom modules power product line and consolidating DC/DC power manufacturing, with expected annualized cost savings of $0.9 million[148] - Unfavorable foreign exchange fluctuations, particularly between the U.S. dollar and Chinese Renminbi, resulted in $5.1 million higher labor and overhead costs in 2021[150] Results of Operations - Summary by Operating Segment In 2021, Connectivity Solutions sales increased by $14.3 million (gross margin declined), Magnetic Solutions sales rose by $26.9 million (offset by higher costs), and Power Solutions and Protection sales grew by $36.5 million (improved gross margin) Net Sales and Gross Margin by Product Line (2021 vs. 2020, in thousands) | Product Line | Net Sales 2021 | Net Sales 2020 | Gross Margin 2021 | Gross Margin 2020 | |:-----------------------------|:---------------|:---------------|:------------------|:------------------| | Connectivity Solutions | $165,027 | $150,731 | 26.4% | 28.0% | | Magnetic Solutions | $160,432 | $133,552 | 21.3% | 24.8% | | Power Solutions and Protection | $218,035 | $181,488 | 27.0% | 25.1% | | Total | $543,494 | $465,771 | 24.7% | 25.7% | - Connectivity Solutions sales increased by $14.3 million in 2021, primarily due to distribution partners ($10.9 million) and commercial aerospace ($5.5 million), offset by a $10.5 million decline in military sales[154] - Magnetic Solutions sales improved by $26.9 million in 2021, driven by increased demand from networking customers, but faced higher labor costs due to competitive PRC labor market and Renminbi appreciation[155] - Power Solutions and Protection sales increased by $36.5 million in 2021, with growth from Bel Power Solutions ($16.7 million, including e-Mobility), CUI sales ($12.7 million), fuse sales ($8.1 million), and EOS acquisition ($12.4 million)[156] Cost of Sales Cost of sales increased to 75.3% in 2021 from 73.9% in 2020, driven by ERP reclassification, higher variable costs, and a $12.8 million increase in other expenses due to the absence of $4.9 million in Chinese government subsidies Cost of Sales as Percentage of Net Sales | Category | 2021 | 2020 | |:------------------|:------|:------| | Material costs | 46.2% | 43.3% | | Labor costs | 9.0% | 9.9% | | Other expenses | 20.1% | 20.7% | | Total cost of sales | 75.3% | 73.9% | - The increase in total cost of sales was primarily due to a reclassification of outsourced manufacturing from labor to material costs following an ERP transition, and higher variable costs from wage increases and unfavorable foreign exchange rates[157] - Other expenses increased by $12.8 million in 2021, partly due to $4.9 million in Chinese government subsidies received in 2020 not recurring[158] Research and Development ("R&D") R&D expenses decreased to $21.9 million in 2021 from $23.6 million in 2020, primarily due to cost savings from the August 2020 closure of the Power R&D facility in Switzerland R&D Expenses (in millions) | Year | R&D Expenses | |:-----|:-------------| | 2021 | $21.9 | | 2020 | $23.6 | - The reduction in R&D expenses in 2021 was largely due to cost savings from the closure of the Power R&D facility in Switzerland in August 2020[159] Selling, General and Administrative Expenses ("SG&A") SG&A expenses increased to $86.6 million in 2021 from $78.7 million in 2020, primarily due to higher salaries and fringe benefits ($5.8 million) and increased legal and professional fees ($1.2 million) SG&A Expenses (in millions) | Year | SG&A Expenses | |:-----|:--------------| | 2021 | $86.6 | | 2020 | $78.7 | - The increase in SG&A was primarily due to higher salaries and fringe benefits ($5.8 million) and increased legal and professional fees ($1.2 million)[160] Restructuring Charges Bel incurred $1.2 million in restructuring charges in 2021 for product line consolidation and discontinuation, following $0.6 million in 2020 charges that yielded $4.4 million in annualized cost savings Restructuring Charges (in millions) | Year | Restructuring Charges | |:-----|:----------------------| | 2021 | $1.2 | | 2020 | $0.6 | - 2021 charges related to consolidating the DC/DC power product line and discontinuing the custom modules product line[164] - 2020 charges related to facility closures (Switzerland, Germany, Hong Kong) and consolidations, resulting in $4.4 million annualized cost savings in 2021[148][164] Interest Expense Interest expense decreased to $3.5 million in 2021 from $4.7 million in 2020, primarily due to lower interest rates and a reduced debt balance Interest Expense (in millions) | Year | Interest Expense | |:-----|:-----------------| | 2021 | $3.5 | | 2020 | $4.7 | - The reduction in interest expense was due to lower interest rates and a lower debt balance in 2021 compared to 2020[165] Other Expense, Net Other expense, net, significantly decreased to $0.4 million in 2021 from $1.8 million in 2020, primarily due to a lower foreign exchange loss of less than $0.1 million in 2021 Other Expense, Net (in millions) | Year | Other Expense, Net | |:-----|:-------------------| | 2021 | $0.4 | | 2020 | $1.8 | - The decrease was primarily due to a foreign exchange loss of less than $0.1 million in 2021, down from $2.2 million in 2020[166] Income Taxes The income tax provision was $2.5 million in 2021 (effective rate 9.2%), a shift from a $(0.7) million benefit in 2020 (effective rate (5.4%)), driven by higher U.S. income and uncertain tax positions Income Tax Provision and Effective Tax Rate (Millions) | Year | Provision for (Benefit from) Income Taxes | Effective Tax Rate | |:-----|:-----------------------------------------------------|:-------------------| | 2021 | $2.5 | 9.2% | | 2020 | $(0.7) | (5.4%) | - The change in effective tax rate was primarily due to increased U.S. tax expense from higher U.S. income and uncertain tax positions in 2021, and favorable impacts from tax law changes (CARES Act) and reversals of uncertain tax positions in 2020[171] - The company's effective tax rate fluctuates based on the geographic region where pretax profits are earned, with Asia generally having the lowest tax rates[151][167] Tax Reform The Tax Cuts and Jobs Act (2017) reduced the U.S. corporate tax rate and introduced GILTI, while 2020 regulations and the CARES Act (2020) provided tax benefits, including a $0.1 million benefit in 2020 - The Tax Cuts and Jobs Act (2017) reduced the U.S. federal corporate tax rate to 21% and introduced Global Intangible Low-Taxed Income (GILTI)[168] - Final regulations under Section 954A in 2020 allowed exclusion of high-taxed income from GILTI, reducing Bel's 2019 GILTI inclusion from $6.8 million to $3.4 million and generating a $1.0 million benefit in 2020[168][169] - The CARES Act (2020) increased the allowable business interest deduction, leading to a net operating loss (NOL) for 2019 and a $0.1 million benefit in 2020[170] Inflation and Foreign Currency Exchange Inflation was immaterial, but 2021 foreign currency appreciation (Renminbi, British pound, Mexican Peso, Euro) against the U.S. dollar increased labor and overhead costs, with Bel using forward contracts to manage short-term exposures - Inflation was not material to consolidated financial position or results of operations during the past two years[176] - Appreciation of the Chinese Renminbi, British pound (6% each), Mexican Peso (5%), and Euro (3%) against the U.S. dollar in 2021 resulted in higher labor and overhead costs[176] - The company periodically uses foreign currency forward contracts to manage short-term exposures to fluctuations in operational cash flows[176] Liquidity and Capital Resources Bel's liquidity includes $61.8 million cash (Dec 31, 2021) and available credit, with 2021 cash decreasing by $23.2 million due to acquisitions, capital expenditures, and debt repayments, while anticipating $1.8 million in interest and $113.7 million in raw material obligations - Principal liquidity sources include $61.8 million cash and cash equivalents (Dec 31, 2021), cash from operating activities, and borrowings available under its credit facility[177] Cash and Cash Equivalents (in millions) | Date | Amount | |:-----------------|:-------| | Dec 31, 2021 | $61.8 | | Dec 31, 2020 | $84.9 | - Cash decreased by $23.2 million in 2021, primarily due to $16.8 million for acquisitions, $9.4 million for capital expenditures, and $104.8 million in debt repayments, partially offset by $100.5 million in revolving credit line borrowings[179] - Future cash requirements include $1.8 million in interest payments and $113.7 million for raw material purchase obligations within the next twelve months[183][185] - As of December 31, 2021, the company had $112.5 million outstanding under its New Credit Agreement and $62.5 million in unused credit available[190] Critical Accounting Estimates Bel's critical accounting estimates, including business combinations, inventory, goodwill impairment, and pension obligations, involve significant judgment and assumptions, with potential material impact on financial results due to inherent uncertainties - Critical accounting estimates include business combinations (fair value allocation, intangible asset valuation), inventory valuation (obsolescence reserves), goodwill and other indefinite-lived intangible assets (impairment testing), and pension benefit obligations (actuarial assumptions)[193] - Goodwill impairment testing uses a combination of income and market approaches, with fair values exceeding carrying values by 40.3% to 136.7% for reporting units as of October 1, 2021[197][199][201][203][204][314] - Inventory reserves for excess or obsolete inventory were $12.1 million at December 31, 2021, up from $9.9 million in 2020, reflecting increased raw material levels[195] - Pension benefit obligations (SERP) are calculated using actuarial assumptions; a 25 basis point increase/decrease in the 2021 discount rate would decrease/increase the obligation by $0.8 million[207] Other Matters Bel believes it has sufficient working capital cash but may seek additional financing for acquisitions, which could impact debt covenants and dilute existing shareholders - The company believes it has sufficient cash reserves for foreseeable working capital needs and may seek additional bank borrowings or debt/equity financing for substantial acquisitions[208] - Additional borrowings or equity issuance could decrease the ratio of earnings to fixed charges, impact restrictive debt covenants, and dilute existing shareholders[208] New Financial Accounting Standards Discussion of new financial accounting standards is incorporated by reference to Note 1, 'Description of Business and Summary of Significant Accounting Policies' - Discussion of new financial accounting standards is incorporated by reference to Note 1, 'Description of Business and Summary of Significant Accounting Policies'[209] Item 7A. Quantitative and Qualitative Disclosures About Market Risk This item is not applicable to the company - Not applicable[209] Item 8. Financial Statements and Supplementary Data This section presents Bel Fuse Inc.'s consolidated financial statements for 2021 and 2020, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, audited by Grant Thornton LLP (2021) and Deloitte & Touche LLP (2020) - The section includes consolidated financial statements for the years ended December 31, 2021 and 2020[210] - Grant Thornton LLP provided an unqualified opinion on the 2021 financial statements and internal control over financial reporting[213][214] - Deloitte & Touche LLP provided an opinion on the 2020 financial statements[230] Index to Consolidated Financial Statements This index lists the consolidated financial statements, accompanying notes, and reports from independent registered public accounting firms - The index provides a list of financial statements and notes, including audit reports from Grant Thornton LLP and Deloitte & Touche LLP[211] Report of Independent Registered Public Accounting Firm (Grant Thornton LLP) Grant Thornton LLP issued an unqualified opinion on Bel Fuse Inc.'s 2021 consolidated financial statements and internal control, identifying goodwill impairment assessment for Connectivity Europe, Power Europe, and CUI as a critical audit matter - Grant Thornton LLP issued an unqualified opinion on the consolidated financial statements for the year ended December 31, 2021[213] - An unqualified opinion was also expressed on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[214] - The critical audit matter was the quantitative goodwill impairment assessment for Connectivity Europe, Power Europe, and CUI reporting units, involving significant management estimates for cash flow forecasts[218][219] Report of Independent Registered Public Accounting Firm (Deloitte & Touche LLP) Deloitte & Touche LLP issued an unqualified opinion on Bel Fuse Inc.'s consolidated financial statements for the year ended December 31, 2020, having served as auditor since 1983 - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements as of and for the year ended December 31, 2020[230] - Deloitte & Touche LLP served as the company's auditor since 1983 and became the predecessor auditor in 2021[233] Consolidated Balance Sheets Bel Fuse Inc.'s consolidated balance sheets show total assets increased to $511.8 million in 2021 from $453.9 million in 2020, while total liabilities rose to $303.1 million from $268.1 million Consolidated Balance Sheet Summary (in thousands) | Item | Dec 31, 2021 | Dec 31, 2020 | |:--------------------------|:-------------|:-------------| | Total Current Assets | $329,016 | $280,216 | | Property, Plant & Equipment, net | $38,210 | $34,501 | | Goodwill, net | $26,651 | $23,966 | | Total Assets | $511,846 | $453,866 | | Total Current Liabilities | $112,012 | $87,536 | | Long-term Debt | $112,500 | $110,294 | | Total Liabilities | $303,103 | $268,067 | | Total Stockholders' Equity | $208,743 | $185,799 | - Total assets increased by $57.98 million (12.8%) from $453.866 million in 2020 to $511.846 million in 2021[235] - Total liabilities increased by $35.036 million (13.1%) from $268.067 million in 2020 to $303.103 million in 2021[235] Consolidated Statements of Operations Bel Fuse Inc.'s 2021 consolidated statements of operations show net sales increased 16.7% to $543.5 million, gross profit rose 33.2% to $134.4 million, and net earnings available to common shareholders more than doubled to $24.8 million Consolidated Statements of Operations Summary (in thousands, except per share data) | Item | 2021 | 2020 | |:------------------------------------------|:----------|:----------| | Net sales | $543,494 | $465,771 | | Cost of sales | $409,111 | $346,041 | | Gross profit | $134,383 | $119,730 | | Income from operations | $31,257 | $18,667 | | Earnings before provision for income taxes | $27,327 | $12,136 | | Provision for (benefit from) income taxes | $2,506 | $(659) | | Net earnings available to common shareholders | $24,821 | $12,795 | | Class A common shares - basic and diluted EPS | $1.90 | $0.97 | | Class B common shares - basic and diluted EPS | $2.02 | $1.05 | - Net sales increased by $77.7 million (16.7%) from $465.771 million in 2020 to $543.494 million in 2021[237] - Net earnings available to common shareholders increased by $12.026 million (94%) from $12.795 million in 2020 to $24.821 million in 2021[237] Consolidated Statements of Comprehensive Income Total comprehensive income was $24.0 million in 2021, down from $18.8 million in 2020, influenced by net earnings, a $1.8 million foreign currency translation loss, and unrealized holding losses on marketable securities Consolidated Statements of Comprehensive Income Summary (in thousands) | Item | 2021 | 2020 | |:------------------------------------------|:----------|:----------| | Net earnings | $24,821 | $12,795 | | Other comprehensive income (loss), net of tax | $(800) | $6,002 | | Total comprehensive income | $24,021 | $18,797 | - Foreign currency translation adjustment resulted in a loss of $(1,769) thousand in 2021, compared to a gain of $6,890 thousand in 2020[239] - Unrealized holding losses on marketable securities amounted to $(106) thousand in 2021, compared to gains of $7 thousand in 2020[239] Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $208.7 million at December 31, 2021, from $185.8 million in 2020, driven by $24.8 million in net earnings and $2.3 million in stock-based compensation, partially offset by $3.4 million in dividends Consolidated Statements of Stockholders' Equity Summary (in thousands) | Item | Dec 31, 2021 | Dec 31, 2020 | |:------------------------------------------|:-------------|:-------------| | Total Stockholders' Equity | $208,743 | $185,799 | | Retained Earnings | $187,935 | $166,491 | | Accumulated Other Comprehensive Loss | $(18,863) | $(18,063) | | Additional Paid-In Capital | $38,419 | $36,136 | - Net earnings of $24.8 million and stock-based compensation expense of $2.3 million contributed to the increase in equity in 2021[241] - Dividends declared totaled $3.4 million in 2021, consistent with 2020[241] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $23.2 million in 2021, with operating cash flow falling to $4.6 million from $46.1 million in 2020, while investing activities used $18.9 million and financing activities used $8.4 million Consolidated Statements of Cash Flows Summary (in thousands) | Item | 2021 | 2020 | |:------------------------------------------|:----------|:----------| | Net cash provided by operating activities | $4,632 | $46,108 | | Net cash used in investing activities | $(18,878) | $(1,515) | | Net cash used in financing activities | $(8,400) | $(32,142) | | Net (decrease) increase in cash and cash equivalents | $(23,183) | $12,650 | | Cash and cash equivalents - end of year | $61,756 | $84,939 | - The decrease in operating cash flow in 2021 was largely due to increases in accounts receivable ($13.0 million) and inventories ($34.0 million)[180][242] - Investing activities in 2021 included $16.8 million for acquisitions and $9.4 million for property, plant, and equipment purchases[179][242] - Financing activities in 2021 included $104.8 million in long-term debt repayments and $3.4 million in dividend payments, partially offset by $115.0 million in revolving credit line borrowings[179][245] Notes to Consolidated Financial Statements These notes provide detailed disclosures for consolidated financial statements, covering accounting policies, business combinations, revenue, goodwill, fair value, debt, segments, retirement plans, share-based compensation, and contingencies Note 1. Description of Business and Summary of Significant Accounting Policies This note describes Bel Fuse Inc.'s business and outlines key accounting policies, including consolidation, estimates, cash equivalents, revenue recognition, goodwill, and recently adopted accounting standards like ASU 2018-14 and ASU 2019-12 - Bel Fuse Inc. designs, manufactures, and sells products that power, protect, and connect electronic circuits, managed through Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions segments[247] - Key accounting policies include revenue recognition when control transfers, inventory valuation at lower of cost or market, and accounting for goodwill and indefinite-lived intangible assets without amortization[256][258] - The company adopted ASU 2018-14 (Defined Benefit Plans) and ASU 2019-12 (Income Taxes) effective January 1, 2021, with no material impact on consolidated financial statements[272][273] Note 2. Acquisitions In 2021, Bel acquired rms Connectors for $9.0 million and EOS Power for $7.8 million, contributing $17.1 million in revenues and $1.9 million in net earnings, enhancing connectivity and power solutions - Acquired rms Connectors on January 8, 2021, for $9.0 million, enhancing military and aerospace product portfolios within Connectivity Solutions[279] - Acquired EOS Power on March 31, 2021, for $7.8 million, expanding penetration of industrial and medical markets and diversifying manufacturing footprint within Power Solutions and Protection[280] - The 2021 acquisitions contributed aggregate revenues of $17.1 million and total estimated net earnings of $1.9 million to the Company in 2021[285] Note 3. Revenue Bel's revenue primarily derives from product sales across Connectivity, Power, and Magnetic Solutions, totaling $543.5 million in 2021 and $465.8 million in 2020, with North America as the largest market - Revenues are substantially derived from sales of products in Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions product groups[288][289][290][291] - Revenue is recognized at a point in time, generally upon shipping or delivery, for direct customer and distributor contracts; for customer-designated hub arrangements, revenue is recognized when control transfers to the customer[294][295][296] Disaggregated Revenue by Geographic Region (in thousands) | Geographic Region | 2021 Net Sales | 2020 Net Sales | |:------------------|:---------------|:---------------| | North America | $317,437 | $265,676 | | Europe | $76,561 | $70,792 | | Asia | $149,496 | $129,303 | | Total | $543,494 | $465,771 | Contract Assets and Liabilities (in thousands) | Item | Dec 31, 2021 | Dec 31, 2020 | |:--------------------------------------|:-------------|:-------------| | Contract assets - current (unbilled receivables) | $28,275 | $14,135 | | Contract liabilities - current (deferred revenue) | $2,224 | $2,077 | Note 4. Goodwill and Other Intangible Assets Goodwill increased to $26.7 million in 2021 due to the EOS acquisition, with no impairment identified in annual tests, while other intangible assets totaled $61.0 million, including indefinite-lived trademarks Goodwill by Segment (in thousands) | Segment | Jan 1, 2021 | Dec 31, 2021 | |:-----------------------------|:------------|:-------------| | Connectivity Solutions | $7,855 | $7,735 | | Power Solutions & Protection | $16,111 | $18,916 | | Magnetic Solutions | $- | $- | | Total Goodwill | $23,966 | $26,651 | - Goodwill increased by $2.685 million in 2021, primarily due to the EOS acquisition ($2.499 million) allocated to the Power Solutions and Protection segment[284][311] - Annual goodwill impairment tests (October 1, 2021 and 2020) showed no impairment, with fair values exceeding carrying values for all reporting units[313][315] Other Intangible Assets, Net (in thousands) | Category | Dec 31, 2021 | Dec 31, 2020 | |:-------------------------|:-------------|:-------------| | Patents, licenses and technology | $10,604 | $13,896 | | Customer relationships | $33,242 | $34,981 | | Trademarks | $17,149 | $16,913 | | Total | $60,995 | $65,789 | - Trademarks have indefinite lives and are tested annually for impairment; no impairment was identified in 2021 or 2020[318][321] Note 5. Fair Value Measurements Bel's fair value measurements include available-for-sale securities (Level 1), foreign currency forward contracts (Level 2), and interest rate swap agreements (Level 2), with long-term debt fair value at $112.5 million as of December 31, 2021 - Available-for-sale securities, primarily in a rabbi trust for SERP, are measured at fair value using Level 1 inputs (quoted market prices)[322] - Foreign currency forward contracts and interest rate swap agreements are measured at fair value using Level 2 inputs (observable data from external sources)[323][324] Fair Value of Total Debt (in millions) | Date | Estimated Fair Value | Carrying Amount | |:-----------------|:---------------------|:----------------| | Dec 31, 2021 | $112.5 | $112.5 | | Dec 31, 2020 | $118.4 | $115.6 | - No financial assets measured at fair value on a recurring basis were categorized as Level 3, and no transfers between levels occurred in 2021 or 2020[325] Note 6. Other Assets Other assets, totaling $16.4 million at December 31, 2021, include COLI and marketable securities in a rabbi trust, informally funding SERP obligations, with COLI cash surrender value increasing by $1.3 million in 2021 - Other assets include $16.4 million (2021) in company-owned life insurance (COLI) and marketable securities held in a rabbi trust, intended to informally fund SERP obligations[328][330] - The cash surrender value of COLI increased by $1.3 million in 2021, recognized as other income (expense), net[329] Note 7. Inventories Inventories increased to $139.4 million at December 31, 2021, from $100.1 million in 2020, primarily due to a rise in raw materials from $40.8 million to $67.1 million Components of Inventories (in thousands) | Component | Dec 31, 2021 | Dec 31, 2020 | |:-----------------|:-------------|:-------------| | Raw materials | $67,127 | $40,846 | | Work in progress | $31,103 | $25,916 | | Finished goods | $41,153 | $33,371 | | Total Inventories | $139,383 | $100,133 | - Inventories increased by $39.25 million (39.2%) from $100.133 million in 2020 to $139.383 million in 2021[332] Note 8. Property, Plant and Equipment, Net Property, plant and equipment, net, increased to $38.2 million in 2021 from $34.5 million in 2020, primarily due to construction in progress, with depreciation expense at $9.7 million in 2021 Property, Plant and Equipment, Net (in thousands) | Component | Dec 31, 2021 | Dec 31, 2020 | |:-------------------------------|:-------------|:-------------| | Land | $1,105 | $1,115 | | Buildings and improvements | $20,915 | $19,917 | | Machinery and equipment | $120,961 | $124,114 | | Construction in progress | $5,081 | $1,603 | | Accumulated depreciation | $(109,852) | $(112,248) | | Total Property, Plant & Equipment, net | $38,210 | $34,501 | - Depreciation expense was $9.7 million in 2021 and $9.3 million in 2020[333] Note 9. Income Taxes Bel's uncertain tax position liability was $28.4 million at December 31, 2021, with a $2.5 million income tax provision in 2021 (effective rate 9%), contrasting with a $(0.7) million benefit in 2020 (effective rate (5%)) Liability for Uncertain Tax Positions (in thousands) | Date | Amount | |:-----------------|:-------| | Dec 31, 2021 | $28,434| | Dec 31, 2020 | $28,516| - Approximately $4.1 million of uncertain tax positions are expected to be resolved within the next twelve months[335] Provision for (Benefit from) Income Taxes (in thousands) | Category | 2021 | 2020 | |:---------|:--------|:--------| | Current | $2,065 | $1,085 | | Deferred | $441 | $(1,744)| | Total | $2,506 | $(659) | Effective Tax Rate Reconciliation | Item | 2021 Tax Rate | 2020 Tax Rate | |:------------------------------------------|:--------------|:--------------| | Tax provision computed at federal statutory rate | 21% | 21% | | Different tax rates applicable to foreign operations | (6%) | 3% | | Reversal of liability for uncertain tax positions - net | (2%) | (12%) | | Impact of U.S. Tax Reform | 0% | (9%) | | Tax provision (benefit) computed at effective tax rate | 9% | (5%) | - Deferred tax assets totaled $25.1 million, with a valuation allowance of $8.1 million for assets not likely to be realized[341][343] Note 10. Debt Bel refinanced its credit facility in September 2021 with a new $175 million revolving credit facility, with $112.5 million outstanding and $62.5 million available as of December 31, 2021, and interest expense decreased to $3.5 million - In September 2021, the company entered into a new $175 million 5-year senior secured revolving credit facility (New Revolver) maturing September 1, 2026[354] Debt Outstanding and Available Credit (in millions) | Item | Dec 31, 2021 | Dec 31, 2020 | |:-------------------------|:-------------|:-------------| | Borrowings outstanding | $112.5 | $110.3 | | Unused credit available | $62.5 | $63.0 | - Interest expense decreased to $3.5 million in 2021 from $4.7 million in 2020, due to lower interest rates and a reduced debt balance[345] - In November 2021, the company executed two interest rate swap agreements totaling $60 million to fix the LIBOR portion of interest rates on a portion of its outstanding debt[363] Note 11. Accrued Expenses Accrued expenses increased to $34.5 million at December 31, 2021, from $28.5 million in 2020, primarily due to higher accrued salaries, bonuses, and subcontracting labor Accrued Expenses (in thousands) | Component | Dec 31, 2021 | Dec 31, 2020 | |:-------------------------------|:-------------|:-------------| | Sales commissions | $2,049 | $2,574 | | Subcontracting labor | $1,622 | $758 | | Salaries, bonuses and related benefits | $21,342 | $17,165 | | Warranty accrual | $1,056 | $1,010 | | Other | $8,384 | $6,969 | | Total Accrued Expenses | $34,453 | $28,476 | - The increase in accrued expenses was primarily due to higher salaries, bonuses, and related benefits, and subcontracting labor[366] Note 12. Derivative Instruments and Hedging Activities Bel uses derivative instruments, including foreign currency forward contracts ($17.1 million notional) and interest rate swap agreements ($60 million), to manage foreign currency and interest rate risks, not for speculation - Bel uses foreign currency forward contracts and interest rate swap agreements to manage foreign currency exchange rate risk and interest rate risk, not for speculative purposes[367] - Outstanding foreign currency forward contracts had notional amounts of $17.1 million as of December 31, 2021[369] - Two interest rate swap agreements, totaling $60 million, were effective December 31, 2021, to fix the LIBOR portion of interest rates on outstanding debt[370] Fair Values of Derivative Financial Instruments (in thousands) | Item | Dec 31, 2021 | Dec 31, 2020 | |:------------------------------------------|:-------------|:-------------| | Total derivative assets | $57 | $12 | | Total derivative liabilities | $135 | $- | Note 13. Segments Bel operates three segments: Connectivity Solutions ($165.0 million net sales, 26.4% gross profit), Power Solutions and Protection ($218.0 million net sales, 27.0% gross profit), and Magnetic Solutions ($160.4 million net sales, 21.3% gross profit), with North America as the largest market - The company operates in three reportable operating segments: Connectivity Solutions, Power Solutions and Protection, and Magnetic Solutions[377] Segment Net Sales and Gross Profit (2021, in thousands) | Segment | Net Sales | Gross Profit | Gross Profit % | |:-----------------------------|:----------|:-------------|:---------------| | Connectivity Solutions | $165,027 | $43,501 | 26.4% | | Power Solutions and Protection | $218,035 | $58,823 | 27.0% | | Magnetic Solutions | $160,432 | $34,106 | 21.3% | Net Sales by Geographic Location (2021, in thousands) | Geographic Location | Net Sales | |:--------------------|:----------| | United States | $317,436 | | Macao | $137,065 | | United Kingdom | $20,000 | | Slovakia | $19,407 | | Germany | $17,856 | | India | $12,430 | | Switzerland | $8,315 | | All other foreign countries | $10,985 | | Consolidated Net Sales | $543,494 | - One customer accounted for **$